Levi Strauss audit committee findings seen already factored into new loan launching Tuesday

By Sara Rosenberg

New York, Sept. 15 - Monday's good news that an audit committee essentially found no wrongdoing by Levi Strauss & Co. on the tax and related accounting issues raised in a wrongful termination suit brought by two former employees of the company's tax department is not expected to result in material changes to the company's proposed credit facility, according to a fund manager.

"It sort of cleared some things up. It will probably help [the deal] a little bit, but I think there are still some issues with the SEC," the fund manager said.

Furthermore, all the terms that were heard last week on the proposed deal "probably took into account this press release", which revealed the audit committee's results, the fund manager added.

The committee concluded that the Levi's tax and related accounting positions were reasonable and legally defensible and noted that in the course of its investigation it did not discover evidence of tax fraud. In addition, no evidence was found that information was improperly withheld from the IRS with respect to these issues in connection with IRS audits, according to the news release.

The investigation was begun after the filing in April of a wrongful termination complaint by two former employees in which they alleged that the company engaged in specified fraudulent tax-motivated transactions over several years, manipulated tax reserves to inflate reported income and violated generally accepted accounting principles and Securities and Exchange Commission regulations in financial statements.

As previously disclosed, the IRS has been examining Levi's consolidated U.S. income tax returns for 1996 to 1999 and certain open issues relating to earlier years. Any adverse outcomes resulting from a settlement or future IRS audit may lead to a deficiency in the company's provision for income taxes on its financial statements and may adversely affect its liquidity, the news release said.

As for the SEC, the company has been communicating with Levi Strauss on an informal basis during the audit committee investigation and "expects to continue these communications with respect to the results of the investigation and further developments relating to the litigation as appropriate," the release added.

Levi's is slated to hold a bank meeting on Tuesday for a new $1.15 billion credit facility, consisting of a $650 million asset-based revolver maturing in 2007 and a $500 million senior secured term loan maturing in 2009.

The term loan is expected to be priced north of Libor plus 500 basis points, have a 2% Libor floor and contain call protection, according to market sources. The revolver is expected to be priced in the area of Libor plus 275 basis points.

In return for the hefty coupon, Libor floor and call protection, the San Francisco brand name clothing company is hoping to have relatively loose covenants in the credit agreement.

Other issues surrounding the deal include recent negative rating agency actions and covenant problems under the existing credit agreement.

Last week, Moody's Investors Service put Levi on review for possible downgrade, including its $750 million senior secured bank facilities at B1 and $1.6 billion of senior unsecured notes maturing through 2012 at B3, due to the need to seek a temporary waiver because of possible non-compliance with covenants.

Standard & Poor's downgraded Levi, including cutting its bank debt to B+ from BB and notes to B from BB-, for the same reason that was behind Moody's review.

Fitch Ratings confirmed Levi's $1.7 billion senior unsecured debt preferreds Ca at B and assigned a BB rating to its planned $650 million asset-based loan due 2007 and a BB- rating to its $500 million term loan due 2009. The outlook, however, remains negative due to the continued challenges Levi faces in stimulating top-line sales growth and maintaining operating margins.

Bank of America is the lead bank on the deal, which is expected to be completed within the next several weeks.

Proceeds from the new financing will replace the company's existing senior secured credit facility consisting of a $375 million revolver and $365 million term loan, as well as $110 million of debt arranged under an accounts receivables securitization.

In the secondary, Goodyear Tire & Rubber Co.'s U.S. revolver was quoted at 95 bid, 96 offered on Monday as the company announced the completion of a labor dispute as approval was finally obtained on a three-year contract with the United Steelworkers of America. And with this dispute behind them, Goodyear anticipates a turnaround of its North American business.

The contract was ratified with 13 of 14 U.S.-based plants voting in favor, including favorable votes from 70% of the eligible workers.

"This ground-breaking agreement is fair and demonstrates what can be accomplished when the parties work cooperatively to address the serious problems facing U.S. manufacturers," said Robert J. Keegan, chairman and chief executive officer, in a news release. "This is a successful conclusion and a necessary step in the North American Tire turnaround process that was outlined to analysts in April.

"The agreement is the product of five months of intense negotiations, and represents the beginning of a new partnership dedicated to improving the competitiveness of our North American operations," Keegan added.

At the start of last week, the Akron, Ohio tire company's revolver was quoted at 94 bid, 95½ offered as reports that nine out 14 factories organized by the United Steelworkers of America had approved the tentative labor agreement that was announced on Aug. 20.

Following the initial announcement of the tentative labor pact, Goodyear's revolver jumped up by two points to 93½ bid, 94½ offered.

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